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Current Liabilities Explained

Despite the fact that current liabilities are IOUs, some are really assets.

NORTHVILLE, MI (Feb. 3, 2000) -- Current liabilities are the debts and obligations that a company must pay within one year. These are short-term debts that arise from the purchase of current assets and include the portion of long-term liabilities due within the next 12 months. Current liabilities are bills due and IOUs hanging over a company's head. Despite this, for a large part, current liabilities are assets.

We all know that cash is good, that cash is king, and as a company, the best place for that cash is in our hands, ready to do our bidding. The longer we can keep that cash in our grubby little mitts, the better. By delaying the payment of short-term obligations, we have more cash available to run and grow our business.

There are five main categories of current liabilities that you'll find on the balance sheet:

Accounts Payable are current liabilities incurred in the normal course of business. It's the money owed to partners and suppliers, with payment due at a later date. If cash is used for a purchase, the purchase will not add to accounts payable.

By delaying the payment of accounts payable, a company can increase the current assets available and provide a short-term boost to earnings. The payment's due? No problem. The check's in the mail (wink, wink).

While putting off accounts payable is generally a good thing, beware of accounts payable growth disproportionate to growth in sales and cash flow. If accounts payable increases more quickly than cash and current assets, the firm's liquidity and ability to meet short-term obligations decreases.

Accrued Expenses are debts that are incurred by a company, but for which payment has not yet been made. These are normally periodic expenses such as wages, interest, and taxes that have not yet come due. From the time the expenses are incurred until the date they are due, they accumulate on the balance sheet as accrued expenses.

Like accounts payable, accrued expenses are generally a "good" liability, often looked at as free short-term financing. However, accrued expenses are not always an example of a company taking its time to pay its creditors. They may merely be an estimate of future expenses or might just represent money owed to employees. Not all accrued expenses are assets and those expanding on a balance sheet should be viewed through relatively skeptical lenses.

Income Tax Payable is the tax a company accrues over the year that it has yet to pay. Corporations make payments on taxes throughout the year based on its estimated taxable income. Generally a company must make installments totaling 90% of estimated taxes due to avoid penalties. Income tax payable is the portion of taxes due but not yet paid.

Short-Term Notes Payable are various kinds of current interest-bearing debt that are accompanied by specific borrowing terms. Most companies will list in a footnote to this item when this debt is due and what interest rate the company is paying.

Long-Term Debt Payable is the portion of noncurrent debt that will come due within the year. This might seem confusing since it's long-term debt in the current liabilities section, but because it will be due within one year of the report, it will be paid currently.

That sums up the majority of items you'll find under the current liability heading of a balance sheet. We'll cut it off here for tonight and look in on noncurrent liabilities next week. In the meantime, read this heartening, Drip-related Fribble.